Saturday, February 19, 2011

Unrest and piracy muddy the waters

Gregor Hunter


How important is the Suez Canal to the transport of crude oil and refined petroleum products?

a. The Suez Canal provides the shortest route for transporting cargo from the Gulf and the Far East to Europe and the US, which together consume roughly 50 per cent of global crude oil production. Due to the canal's limited ability to accommodate the largest vessels, the SuMed (Suez-Mediterranean) pipeline, which also runs through Egypt, is used to transport crude oil from the south side of the canal to the north side, where ships reload in the Mediterranean. A disruption in canal traffic could change tanker routes, leading to increased movement of liquid cargo from regions outside the Gulf (for instance, west Africa and Venezuela), which would tighten global ship capacity and cause tanker rates to increase. The perception of heightened geopolitical risk or another "fear factor" could also cause the market to react. For example, storage of liquid cargo could increase, which would further tighten ship capacity and support rate gains.

How would tanker operators change operations or route their ships if there is a disruption to the Suez Canal?

A disruption to the Suez Canal would mean significantly longer voyage time for ships. A ship sailing from the Gulf to the US and travelling through the canal would, depending on its speed, complete its voyage in about 25 to 30 days. Without access to the canal, the same voyage, routed through the Indian Ocean, around the Cape of Good Hope and then all the way back north to the US could take as much as 50 days. Similarly, a ship travelling to Europe through the canal could complete its voyage in 12 to 15 days. Without access to the canal, the trip could take as much as 15 additional voyage days. On top of the increasing transit time, rerouting ships along the Horn of Africa and into the Indian Ocean puts them in the middle of sea lanes menaced by pirates operating from Somalia - increasing the probability of hijacking attacks.

Could tanker operators benefit from a potential disruption to the Suez Canal?

Depending on the severity and duration of such a disruption, tanker operators would benefit from longer ton-miles travelled, which would lead to higher vessel utilisation and reduce current tanker overcapacity. This would, in turn, bring improved tanker rates - a positive factor for an industry still working its way through three years of excess vessel supply. We believe that if this scenario were to play out, product tankers such as LR1s (long-range product tankers, which often carry refined products such as petrol) and Panamaxes (small tankers) would feel the most immediate impact, since these ships account for a fair amount of liquid cargo transiting the canal, primarily to Europe and to a lesser extent to the US. A sustained disruption to the canal, we believe, would cause increased demand for the largest tankers - ultra large crude carriers (ULCCs) and very large crude carriers (VLCCs) - because they provide the most economies of scale for hauling cargo over long distances. ULCC and VLCC tanker rates are very sensitive to even the smallest changes in vessel demand relative to supply. According to Morten Arntzen, the chief executive of OSG, a closure of the canal could result in a need for 10 to 20 additional VLCCs, allowing VLCC rates to move from their currently unprofitable levels to moderately acceptable ones.

Who pays for tanker companies' rising operating costs?

Voyage and vessel expenses have been creeping up over the past year. Bunker fuel, the single most important cost driver for a tanker operator, has increased to about US$600 (Dh2,203) per ton from about $450 per ton a year ago - still below the peak levels of about $750 per ton in 2008, however. Tanker operators providing vessels under time-charter contracts have built-in fuel escalators and are, thus, able to pass on bunker fuel costs to the charterer. Spot-market operators in a weak tanker market, as we currently have, are less able to pass on higher bunker fuel costs because they don't have the ability to boost rates as readily as they would in a stronger market.

How have Somali pirate attacks affected ship operators?

Pirates from Somalia operating in the Indian Ocean off east Africa have become increasingly brazen, using firearms, launching attacks in deeper waters (now accessible to pirates with larger ships) and kidnapping hostages for use as human shields to force their demands. In November, pirates were paid a record $9.5 million ransom to secure the release of the Samho Dream, a South Korean crude oil tanker. In 2005, the average ransom paid to pirates was $150,000. In response, shipping lines sailing the Indian Ocean and along the west coast of Africa (especially the Nigerian Delta and Equatorial Guinea), another region seeing mounting insurgent activity, may have to obtain war risk insurance, engage armed security services, travel in convoys or retrofit vessels with antipiracy deterrents such as barbed wire fencing, high-pressure water hoses and safe rooms. Some carriers have successfully passed on the additional costs of incorporating these measures to charterers, and others have had to absorb the additional expenses. As is true for potential disruption of the Suez Canal, vessel operators benefit if these events force longer journeys, because those extra miles require more ships and help the balance of supply and demand.

How have the unrest in Egypt and pirate attacks affected rated tanker operators?

So far, there have been no direct effects on rated tanker companies, although they may benefit indirectly from rising rates. We will continue to monitor the effects of political developments … and pirate attacks.

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